Picture a world where there are no banks… Sounds far-fetched and crazy?
Imagine a world where each digital dollar that you own, backed by the central bank. Gone are the days where you have to use debit cards to pay for goods or use cheques to pay your suppliers.
What am I talking about?
Central Bank Digital Currencies!
What are Central Bank Digital Currencies?
As I’ve mentioned in a previous article, CBDCs are the tokenised version of a country’s money. It’s main aim is to allow people to deposit funds directly into a central bank, which circumvents the need to go through traditional lenders (banks).
They represent a quantum leap in money and a revolutionary change in finance. The most common comment that regular people make about central bank digital currencies is that most payments are now run digitally, what difference does it make to the average joe?
Well, first of all when you’re making e-payments for your online shopping, what happens is that when you key in your credit card information, a payment gateway (PayPal/ Stripe) safely stores your credit card information and processes the transaction, verifying the details with the acquiring bank (customer’s bank) at the same time. The payment gateway then sends the information to the merchant (seller) to inform the customer that everything is kosher and that the purchased product will be sent out ASAP.
There is also the interaction between payment gateway and merchant account that has to be taken into consideration. Obviously, one cannot assume that acquiring banks and merchant banks have a direct line to each other, that is why such intermediaries like Stripe have turned into a payment behemoth, by providing services that seem almost magical to the uninitiated.
Compare this with CBDC transactions where e-commerce merchants will only need a way to connect with the central bank distributed ledger and use a cryptographic wallet software to transfer the tokens over. This process is extremely efficient and costs way less than using the traditional banking plumbing system.
On top of that, financial institutions are the gateway between accessing digital payment methods stemmed from central bank money and us!
And so, financial institutions hold lots of power in their hands. Should they choose not to serve you, it prevents individuals from getting paid, or paying other people in society.
What Does it Mean for Us?
Expectation: We’re in for a bumpy ride …
Reality: Nobody really knows how everything will pan out …
The main issue that CBDCs claim to solve is to make finance work better for the people.
However, it also creates a shift in power from individuals and private institutions, to the state. It has the power to alter geopolitics and change the rules of capital allocation.
CBDCs feel like the next logical step into the financial frontier, but personally, I feel apprehensive about this future. Not because I’m someone that will fight tooth and nail to resist change, but rather a massive transfer of power from banks to the state.
On one hand, everyone is still cognizant about the events that happened in the financial industry in 2008 and many people out there are still very angry at how arrogant banks have gotten despite their massive failings.
And so, I do understand that there are a handful of people that would prefer the state to do “God’s Work” for them, having every dollar being backed by the full faith of the state, not with banks who have done God knows what with your money.
Government e-currencies would also cut down on the expenses of the financial industry, which cost over $350 a year for every person on Earth.
This comes at a huge cost as we can expect power to be centralised with the state rather than private institutions. Yes, individuals will enjoy the ease of transacting digital money and not having to deal with the lack of communication between banks to provide payment settlement.
But, CBDCs can be used a mechanism of control. Have a parking ticket? Ka-ching! The state takes it from your wallet, just like that.
Imagine CBDCs used as a weapon of mass surveillance where every dollar spent can be tracked on the central bank ledger. This is exactly what china has done with the introduction of their e-yuan, more on that later.
CBDCs may also change the way monetary policies are executed. Currently, central banks use the banking system to enact their policies. With private networks being more prominent because of the use of CBDCs, this could create an issue for central banks when they are trying to inject funds into the economy during a crisis.
How Will It Affect Lending?
If distribution of resources shifts from retail banks to central banks, people who stash all their money in central bank wallets will affect the lending industry, which are mostly done at banks.
Lenders will have to look for alternative lending solutions or if central banks decide to provide such a service for the people, the financial industry will be heavily affected as the de facto place to secure loans.
Because of the potential lack of borrowing services, it could be open season for Nigerian princes and suspicious individuals to prey on older and less technologically savvy people.
On top of that, the thought of government bureau-bots approving loans for your house isn’t all that appealing to most people. These central bank loans powered by CBDCs can be used as a conduit to promote systemic racism within countries that are more susceptible to such issues.
If foreign currencies are not controlled in smaller countries, it could lead to all sorts of craziness when transacting in USD rather than in the country’s own legal tender (which governments have to update in the future).
Use Case: China E-Yuan
A trial conducted last year for 50,000 people in Shenzhen allowed them to use China’s digital currency, known as E-CNY. Each of these 50,000 people were awarded $200 Yuan to spend on anything.
Each E-CNY is backed by a deposit in the People’s Bank Of China. Since the trial last year, more than half a million people have already received E-CNY.
Like I mentioned in the previous segment and several other articles, blockchain has the power to completely liberate people or control people. E-CNY is no different, with every transaction carefully surveilled, the central bank sees everyone’s spending in real time. The central bank is also looking into how E-CNY can be spread abroad, which reeks of world domination and cross-border surveillance to me.
At the same time, Chinese authorities have already been doing this with their control over NetsUnion, which is a centralised clearing platform that payment apps like Alipay and WeChat have to use.
Right now, E-CNY’s goal is not to disturb the financial system, but to only replace the M0 money supply which is currency that is in circulation. It does not want to undermine the financial system by getting account hoarders to swap their money into E-CNY, making it incredibly hard for banks to do their business.
With all the grand plans that the Chinese central bank has for E-CNY, the fact of the matter is that one of the trialist has stated that she would use E-CNY for some payments and WeChat or Alipay for the bulk of her daily transactions simply because it provides way more convenience than E-CNY.
There are many rumours out there that the Chinese government is unhappy with the progress of E-CNY and that has led to the many subtle threats towards the crypto market, causing the huge drop of all cryptocurrencies in the market now.
The introduction to CBDCs will have to be coupled with conversations about privacy, surveillance laws, central bank policies that will have a knock on effect on the financial industry.
No matter what other countries take away from China’s foray into CBDCs, one thing’s for sure, their cautious approach towards the E-CNY experiment tells us just how disruptive this piece of technology can be for society, should it be allowed to run amok.
Till next week!